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Fair Value Measurements | 3 Months Ended
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Mar. 31, 2013
Fair Value Measurements [Abstract] |
Fair Value Measurements | Note 15 - Fair Value Measurements LCNB measures certain assets at fair value using various valuation techniques and assumptions, depending on the nature of the asset. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. The inputs to valuation techniques used to measure fair value are assigned to one of three broad levels:
· | Level 1 – quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the reporting date.
· | Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly or indirectly. Level 2 inputs may include quoted prices for similar assets in active markets, quoted prices for identical assets or liabilities in markets that are not active, inputs other than quoted prices (such as interest rates or yield curves) that are observable for the asset or liability, and inputs that are derived from or corroborated by observable market data.
· | Level 3 - inputs that are unobservable for the asset or liability.
The majority of LCNB's investment securities are classified as available-for-sale. The securities are reported at fair value on a recurring basis with unrealized holding gains and losses reported net of income taxes in accumulated other comprehensive income. LCNB utilizes a pricing service for determining the fair values of most of its investment securities. Fair value for U.S. Treasury Notes and corporate securities are determined based on market quotations (level 1). Fair value for most of the other investment securities is calculated using the discounted cash flow method for each security. The discount rates for these cash flows are estimated by the pricing service using rates observed in the market (level 2). Cash flow streams are dependent on estimated prepayment speeds and the overall structure of the securities given existing market conditions. In addition, the Company has invested in two mutual funds that invest in debt securities or loans that qualify for credit under the Community Reinvestment Act. The investment in one of the mutual funds is considered to have level 1 inputs because it is publically traded in an active market and it publishes a daily net asset value. The investment in the other mutual fund is considered to have level 2 inputs because, although its shares are not traded in an active market, an investor can have its interest in the fund redeemed for the balance of its capital account at any quarter-end assuming the fund is given a 60 day notice. The investment in this fund is carried at cost and approximates fair value. A third mutual fund invests in U.S. Government securities. It is considered to have level 1 inputs because it is publically traded in an active market and it publishes a daily net asset value. Additionally, LCNB owns trust preferred securities in various financial institutions and equity securities in various financial and non-financial companies. Market quotations (level 1) are used to determine fair value for these investments. Assets that may be recorded at fair value on a nonrecurring basis include impaired loans, other real estate owned, and other repossessed assets. A loan is considered impaired when management believes it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impaired loans are carried at the present value of estimated future cash flows using the loan's existing rate or the fair value of collateral if the loan is collateral dependent, if this value is less than the loan balance. When the fair value of the collateral is based on an observable market price or current appraised value, the inputs are considered to be level 2. When an appraised value is not available and there is not an observable market price, the inputs are considered to be level 3. Other real estate owned is adjusted to fair value upon transfer of the loan to foreclosed assets, usually based on an appraisal of the property. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. The inputs for a valuation based on current appraised value are considered to be level 2. The following table summarizes the valuation of LCNB's assets recorded at fair value by input levels as of March 31, 2013 and December 31, 2012 (in thousands):
|  |  | Fair Value Measurements at the End of the Reporting Period Using |  |  |  |
|  | Fair Value Measurements |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |  |  | Total Gains (Losses) |
March 31, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury notes |  | $ | 19,693 |  |  |  | 19,693 |  |  |  | - |  |  |  | - |  |  |  | - |
U.S. Agency notes |  |  | 101,499 |  |  |  | - |  |  |  | 101,499 |  |  |  | - |  |  |  | - |
U.S. Agency mortgage-backed securities |  |  | 54,156 |  |  |  | - |  |  |  | 54,156 |  |  |  | - |  |  |  | - |
Certificates of deposit with other banks |  |  | 1,509 |  |  |  | - |  |  |  | 1,509 |  |  |  | - |  |  |  |  |
Municipal securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-taxable |  |  | 78,744 |  |  |  | - |  |  |  | 78,744 |  |  |  | - |  |  |  | - |
Taxable |  |  | 17,592 |  |  |  | - |  |  |  | 17,592 |  |  |  | - |  |  |  | - |
Mutual funds |  |  | 2,223 |  |  |  | 1,223 |  |  |  | 1,000 |  |  |  | - |  |  |  | - |
Trust preferred securities |  |  | 148 |  |  |  | 148 |  |  |  | - |  |  |  | - |  |  |  | - |
Equity securities |  |  | 1,995 |  |  |  | 1,995 |  |  |  | - |  |  |  | - |  |  |  | - |
Total recurring fair value measurements |  | $ | 277,559 |  |  |  | 23,059 |  |  |  | 254,500 |  |  |  | - |  |  |  | - |
Nonrecurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 4,589 |  |  |  | - |  |  |  | 707 |  |  |  | 3,882 |  |  |  | - |
Other real estate owned and repossessed assets (a) |  |  | 1,687 |  |  |  | - |  |  |  | 1,687 |  |  |  | - |  |  |  | 230 |
Total nonrecurring fair value measurements |  | $ | 6,276 |  |  |  | - |  |  |  | 2,394 |  |  |  | 3,882 |  |  |  | 230 |
December 31, 2012 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Recurring fair value measurement: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury notes |  | $ | 18,686 |  |  |  | 18,686 |  |  |  | - |  |  |  | - |  |  |  | - |
U.S. Agency notes |  |  | 90,606 |  |  |  | - |  |  |  | 90,606 |  |  |  | - |  |  |  | - |
U.S. Agency mortgage-backed securities |  |  | 52,541 |  |  |  | - |  |  |  | 52,541 |  |  |  | - |  |  |  | - |
Corporate securities |  |  | 3,067 |  |  |  | 3,067 |  |  |  | - |  |  |  | - |  |  |  | - |
Municipal securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-taxable |  |  | 73,882 |  |  |  | - |  |  |  | 73,882 |  |  |  | - |  |  |  | - |
Taxable |  |  | 15,841 |  |  |  | - |  |  |  | 15,841 |  |  |  | - |  |  |  | - |
Mutual funds |  |  | 2,168 |  |  |  | 1,168 |  |  |  | 1,000 |  |  |  | - |  |  |  | - |
Trust preferred securities |  |  | 245 |  |  |  | 245 |  |  |  | - |  |  |  | - |  |  |  | - |
Equity securities |  |  | 1,470 |  |  |  | 1,470 |  |  |  | - |  |  |  | - |  |  |  | - |
Total recurring fair value measurements |  | $ | 258,506 |  |  |  | 24,636 |  |  |  | 233,870 |  |  |  | - |  |  |  | - |
Nonrecurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 4,276 |  |  |  | - |  |  |  | 161 |  |  |  | 4,115 |  |  |  | - |
Other real estate owned and repossessed assets (b) |  |  | 2,189 |  |  |  | - |  |  |  | 2,189 |  |  |  | - |  |  |  | (295 | )
Total nonrecurring fair value measurements |  | $ | 6,465 |  |  |  | - |  |  |  | 2,350 |  |  |  | 4,115 |  |  |  | (295 | )
(a) Two other real estate owned properties with a total carrying amount of $173,000 were written down to their combined fair value of $156,000, resulting in an impairment charge of $17,000. Four other real estate owned properties with a total carrying amount of $612,000 were sold for a combined total of $857,000, resulting in a net gain of $245,000. A repossessed asset with a carrying value of $6,000 was sold for $8,000, resulting in a net gain of $2,000. The write-downs, losses, and gains were included in other non-interest expense for the period. |
(b) Eight other real estate owned properties with a total carrying amount of $1,809,000 were written down to their combined fair value of $1,525,000, resulting in an impairment charge of $284,000. Another property was sold at a loss of $8,000. Repossessed assets with a carrying value of $23,000 were sold for a combined total of $20,000, resulting in a net loss of $3,000. The write-downs and losses were included in other non-interest expense for the period. |
Carrying amounts and estimated fair values of financial instruments as of March 31, 2013 and December 31, 2012 are as follows (in thousands):
|  | March 31, 2013 |  |  | December 31, 2012 |
|  | Carrying |  |  | Fair |  |  | Carrying |  |  | Fair |
|  | Amount |  |  | Value |  |  | Amount |  |  | Value |
FINANCIAL ASSETS: |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 28,313 |  |  |  | 28,313 |  |  |  | 13,475 |  |  |  | 13,475 |
Investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale |  |  | 277,559 |  |  |  | 277,559 |  |  |  | 258,506 |  |  |  | 258,506 |
Held-to-maturity |  |  | 22,831 |  |  |  | 22,831 |  |  |  | 15,424 |  |  |  | 15,424 |
Federal Reserve Bank stock |  |  | 1,106 |  |  |  | 1,106 |  |  |  | 949 |  |  |  | 949 |
Federal Home Loan Bank stock |  |  | 2,854 |  |  |  | 2,854 |  |  |  | 2,091 |  |  |  | 2,091 |
Loans, net |  |  | 546,263 |  |  |  | 554,993 |  |  |  | 450,346 |  |  |  | 453,060 |
FINANCIAL LIABILITIES: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 820,870 |  |  |  | 825,318 |  |  |  | 671,471 |  |  |  | 675,964 |
Short-term borrowings |  |  | 11,609 |  |  |  | 11,609 |  |  |  | 13,756 |  |  |  | 13,756 |
Long-term debt |  |  | 13,128 |  |  |  | 14,066 |  |  |  | 13,705 |  |  |  | 14,724 |
The fair value of off-balance-sheet financial instruments at March 31, 2013 and December 31, 2012 was not material. Fair values of financial instruments are based on various assumptions, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in actual transactions. In addition, because the required disclosures exclude certain financial instruments and all nonfinancial instruments, any aggregation of the fair value amounts presented would not represent the underlying value of LCNB. The following methods and assumptions were used to estimate the fair value of certain financial instruments: Cash and cash equivalents The carrying amounts presented are deemed to approximate fair value. Investment securities Fair values for securities, excluding Federal Home Loan Bank and Federal Reserve Bank stock, are based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and/or discounted cash flow analyses. The carrying value of Federal Home Loan Bank and Federal Reserve Bank stock approximates fair value based on the respective redemptive provisions. Loans Fair value is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, incorporating assumptions of current and projected prepayment speeds. These current rates approximate market rates. Deposits The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities, which approximates market rates. Borrowings The carrying amounts of federal funds purchased, repurchase agreements, and U.S. Treasury demand note borrowings are deemed to approximate fair value of short-term borrowings. For long-term debt, fair values are estimated based on the discounted value of expected net cash flows using current interest rates. The following table summarizes the categorization by input level as of March 31, 2013 and December 31, 2012 of LCNB's financial assets and liabilities not recorded at fair value but for which fair value is disclosed (in thousands):
|  |  | Fair Value Measurements at the End of the Reporting Period Using |
|  | Fair Value Measurements |  |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  |  | Significant Other Observable Inputs (Level 2) |  |  | Significant Unobservable Inputs (Level 3) |
March 31, 2013 |  |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Loans, net |  | $ | 550,404 |  |  |  | - |  |  |  | 550,404 |  |  |  | - |
Investment securities, non-taxable, held-to-maturity |  |  | 22,831 |  |  |  | - |  |  |  | - |  |  |  | 22,831 |
Federal Reserve Bank stock |  |  | 1,106 |  |  |  | 1,106 |  |  |  | - |  |  |  | - |
Federal Home Loan Bank stock |  |  | 2,854 |  |  |  | 2,854 |  |  |  | - |  |  |  | - |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 825,318 |  |  |  | - |  |  |  | 825,318 |  |  |  | - |
Long-term debt |  |  | 14,066 |  |  |  | - |  |  |  | 14,066 |  |  |  | - |
December 31, 2012 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans, net |  | $ | 448,784 |  |  |  | - |  |  |  | 448,784 |  |  |  | - |
Investment securities, non-taxable, held-to-maturity |  |  | 15,424 |  |  |  | - |  |  |  | - |  |  |  | 15,424 |
Federal Reserve Bank stock |  |  | 949 |  |  |  | 949 |  |  |  | - |  |  |  | - |
Federal Home Loan Bank stock |  |  | 2,091 |  |  |  | 2,091 |  |  |  | - |  |  |  | - |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 675,964 |  |  |  | - |  |  |  | 675,964 |  |  |  | - |
Long-term debt |  |  | 14,724 |  |  |  | - |  |  |  | 14,724 |  |  |  | - |

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13504-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15C, 15D -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. 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Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13537-108611 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15B -Subparagraph a, b -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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